Good day and welcome to the Alamo Group Inc. Third Quarter 2023 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Edward Rizzuti, Executive Vice President, General Counsel and Secretary. Please go ahead.

Thank you. By now you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact us at 212-827-3746 and we will send you a release and make sure you're on the company's distribution list. There will be a replay of the call, which will begin one hour after the call and run for one week. The replay can be accessed by dialing 1-877-344-7529 with the passcode 1294689. Additionally, the call is being webcast on the company's website at www.alamo-group.com and a replay will be available for 60 days. On the line with me today are Jeff Leonard, President and Chief Executive Officer and Richard Wehrle, Executive Vice President, Chief Financial Officer, and Treasurer. Management will make some opening remarks and then we will open-up the line for your questions. During the call today, management may reference certain non-GAAP numbers in their remarks. Reconciliations of these non-GAAP results to applicable GAAP numbers are included in the attachments to our earnings release. Before turning the call over to Jeff, I'd like to make a few comments about forward-looking statements. We will be making forward-looking statements today that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties which may cause the company's actual results in future periods to differ materially from forecasted results. Among those factors which could cause actual results to differ materially are the following; adverse economic conditions which could lead to a reduction in overall market demand supply chain disruptions, labor constraints competition weather, seasonality, currency-related issues, geopolitical events, and other risk factors listed from time-to-time in the company's SEC reports. The company does not undertake any obligation to update the information contained herein, which speaks only as of this date. I would now like to introduce Jeff Leonard. Jeff, please go ahead.

Thank you, Ed. We want to thank everyone, who's joined us on the conference call today and express our appreciation for your continued interest in Alamo. The third quarter shaped up broadly in line with our expectations and we were very pleased with the financial results reported today that were produced in an increasingly challenging operating environment. Despite persistent inflation, higher interest rates and ongoing labor constraints, our teams achieved record quarterly results for sales and earnings for the eighth consecutive quarter. I would now like to turn the call over to Richard, who will take us through a review of our financial results for the third quarter. I will then provide additional comments on the results and say a few words about the outlook for the next few quarters. Following our formal remarks, we will look forward to taking your questions. So Richard, please go ahead.

Thanks, Jeff and good morning, everyone. Alamo Group's third quarter 2023 closed with an excellent performance that produced record net sales and net income driven by continued strong demand for our products. Third quarter consolidated net sales were $419.6 million an increase of 14%, compared to $368.8 million in the third quarter of last year. Gross margin percentage expanded by 220 basis points and gross margin increased by just under $22 million in the quarter compared to the third quarter of 2022. Both margin dollars and percentages were driven by higher volume and price initiatives, we began in early 2022 along with improved productivity gains. Operating income for the third quarter came in at $49.8 million versus $35.8 million in the third quarter of 2022 an increase of 39%. Operating income as a percent of sales was just under 12% for the third quarter versus just under 10% for the same quarter last year. Consolidated net income for the third quarter was $34.9 million or $2.91 per diluted share, an increase of 35% versus net income of $25.8 million or $2.16 per diluted share for the third quarter of 2022. Looking at the division's The Vegetation Management Division, once again delivered solid results. Net sales were $246.9 million an increase of 8% compared to $228.5 million for the third quarter of 2022. Strong sales of governmental and agricultural mowing equipment in North America, UK, Europe -- UK and Europe led the way for this division, despite labour shortages and to a lesser extent supply chain disruptions. Margins improved primarily due to increased net price realization. Operating income for the third quarter in this division was $30.3 million, up 12% versus $27.1 million for the same period in 2022. Industrial Equipment net sales -- division net sales were $172.7 million up…

Thank you, Richard. I'd like to express my personal thanks to everyone who joined our conference call today. While both operating divisions achieved solid top line sales growth as expected growth in the Industrial Equipment division was stronger. Governmental agencies continue to invest in updating their infrastructure maintenance fleets, and as supply chain bottlenecks continued to resolve. Although, certain types of components remain problematic, supply chain performance improved again during the third quarter. Receipts of Class 6 to 8 truck chassis that represent the bulk of our requirements improved sequentially while the supply of Class 5 and smaller chassis, which are less significant to us became somewhat more restricted. As has been the case for the past year certain types of industrial components continue to be constrained and intermittent shortages once again adversely impacted our production operations. Markets for our Vegetation Management equipment division remained under pressure in the third quarter from the combined effects of higher interest rates a weaker housing market a bumper corn crop and persistent drought in much of the Midwest and Southern United States. Order bookings in this division were down slightly compared with the third quarter of 2022, but were sharply higher than the second quarter of this year. U.S. farmers continue to express concerns about high input costs rising interest rates and lower crop and livestock prices. Hobby farm and ranch dealer inventories while not at a concerning level from a historical perspective are under increasing scrutiny due to rising financing costs, tighter credit, and greater buyer caution. Higher interest rates also constrained demand for our larger forestry and wood recycling equipment as many of these larger ticket purchases are subject to third quarter -- third-party financing. Housing starts in the third quarter declined about 1% compared to the second quarter, but were…

We will now begin the question-and-answer. [Operator Instructions] Our first question comes from Mike Shlisky with D.A. Davidson.

Good morning, and thank you for taking my question. I'd like to let me start out with some commentary on the orders between the two segments. You had mentioned and the press release said, backlogs were up a bit and Industrial down a bit, but Vegetation clearly was flat overall and that's great to see in this environment. But the two segments have margin differences and I'm curious if there will be a big margin headwind to mix over the next couple of quarters, because the volumes that you have in Industrial especially with good margin instances like a snow removal, does that allow for higher margin and perhaps a little bit more of easing out of the two segments margins over a period of time here?

Yeah. That's a very insightful question Mike and you're exactly right. That's how we see this unfolding. I think Vegetation Management can hold their margins for the next couple of quarters and gradually improve next year as I said. But Industrial continues to gain momentum and we're not where we can be in that division by any means yet. And then the nice story is snow removal, because it's a segment that's traditionally been a little bit dilutive for us from a margin point of view, but it's performing exceptionally well right now with higher backlogs as well, and I think that will tend to blend the industrial margins higher and keep on a good pace there. So we think Industrial is still gaining momentum. They're not out of gas yet at all from any point of view with regard to the operating margin they can achieve and so I don't really think you're going to see that dilution that you're thinking about. But it's a very insightful question.

Great. Thanks for that. Then a quick margin question for you. Have you given a lot of -- any thoughts to maybe upping those margin targets over the next few quarters? Clearly one of your competitors one of your largest competitors just upped their margin targets. I'd be curious, your thought process there, Jeff?

Yeah. We're going to be discussing that. We're going to have our budget round starting actually next week Mike so we'll discuss that. Then after we've met with all the marketing teams and then we'll give you our feedback on that. But as I said, as we get to 12 [ph], and we can stay there for a while we'll bump it up again. I just had that conversation with our Board of Directors yesterday. So yes I'm sure we will readjust it.

Great. Maybe one last one for me and maybe this is for Richard. Given where your business is heading over the next couple of quarters as your comments indicated and where things could go from an inventory and working capital perspective, I'm curious if you've got any room you think to maybe up the debt reduction over time given the current environment?

Yeah, Mike. I think we're anticipating that we will reduce debt some more here net-net debt. We pulled money internationally back at the end of the year to pull it out of cash and go ahead and apply it to debt, but we only do 30-day notes on that. But true debt, we expect to drop here in the fourth quarter. I think Q1 is usually one where we actually will start increasing inventory levels just to start manufacturing, because all of our pre-season programs have come through. But I think if we can overall hold that or actually reduce a little bit in the first quarter that's going to send huge momentum for us going into Q2 and Q3 for next year. So our intent is to keep doing it so.

Great. Thanks so much. I’ll leave it there.

Thank you, Mike.

Our next question comes from Chris Moore with CJS Securities. Please go ahead.

Hey. Good morning, guys. Congrats on a great quarter.

Thanks, Chris.

Good morning. To start another question maybe on margins. So, Industrial margins obviously up significantly year-over-year and sequentially. Vegetation down a little bit sequentially but up year-over-year. I was just wondering when you look out into 2024, do you ever see those margins crossing? Is there a scenario where Industrial actually is a little bit better than Vegetation for a couple of quarters? Or is that not likely?

Chris, I'll tell you what I shared with our Board yesterday. I expect the margins in the two divisions to converge on the higher ground, if you know what I mean by that. So I think Vegetation Management will gradually even gain a little bit back, because they've had to do some fairly significant incentives to move inventory out of the channel. I discussed that last quarter as well. And I see that tapering off because that situation has showed nice improvement in the third quarter. And then as I said, Industrial is going to continue to gain momentum and ground on their margins. Their operating efficiencies are still not where they have been prior to pandemic and the supply chain continues to improve. The mix in backlog is outstanding right now. It's really, really good in terms of price profile in the backlog. So, as I said, I think they'll converge at the higher ground and pretty close maybe a little bit above our targeted levels.

Fantastic. You had previously talked about accounts receivable turnover potentially being an indicator, especially in Vegetation on the health of the sector. And I'm just wondering what you learned on that front in Q3?

Yes Chris, this is Richard. From Vegetation, it held fine. We didn't -- we were a little bit concerned but overall it did well. Industrial we had a few little hiccups during the quarter but they've ended up cleaning out here in October. Some of them where we had a little warranty issue on a couple of products but other than that no major problems on our DSOs and turning in the right direction so.

Got it. And maybe the last one. Just -- I mean pure ag is a small percentage of your overall Vegetation segment. I'm just wondering kind of what you're seeing on the more pure ag side?

Yes. It's kind of holding its own. The inventory level has got a lot of control during the second quarter Chris as we mentioned to you but we did clear quite a bit of that out in Q3. And if you could see the bookings we don't disclose in ag but the bookings in ag were very encouraging in the third quarter and up very sharply from where they were in the second quarter. So that's a very bullish sign for how that sector is going to play out for us and I think that will turn to revenue in the early quarters of next year. As I said I think the middle of next year we'll be in a much better position in ag.

Terrific. I’ll leave it there. Thanks guys.

Thanks. Appreciate it, Chris.

Our next question comes from Greg Burns with Sidoti & Company. Please go ahead.

Good morning. So I understand the drivers of the areas of weakness in the Vegetation Management segment. But on the government piece the side that's showing good growth, are there any specific drivers in particular driving the demand in that part of the business?

I couldn't say there are anything in particular, Greg. It's just the municipalities continue to be in very good shape because as I said the gains in Industrial go right across our product line and they do cross both division lines by the way. The mowing side of our governmental business is in Vegetation Management and that's still operating in record territory. Very high margins and very good backlog. So I don't really see that changing for the time being. Municipalities are in good shape, but a really, really sharp downturn in housing would obviously impact property tax receipts, but that hasn't played out so far. Housing prices have remained elevated, so I don't see it changing in the near term to be candid with you. And I still think there's a bit of catch-up buying from the pandemic going on.

Okay. And then in terms of Royal Truck, how much -- I guess what was our trailing 12-month revenue? And what kind of growth do that business have and margin profile?

I think if you look at our 10-Q we put in there the trailing 12 months is roughly about $44 million.

Okay great.

And Greg before you go, I'll add one more comment about Royal. They're continuing to gain momentum. We've been able to help them already with chassis supply and I think that's going to help them pick up the pace here in the fourth quarter.

Okay. And I guess just one last one. I mean, is this a new vertical segment you're going to look to do additional acquisitions to scale up? Or does -- can Royal Truck stand on its own? Or how do you view that?

No, it's a very interesting segment. It's still quite fragmented Greg, so it's an opportunity for us to do what we do enter a new space and then kind of build out a position in it. We've been chasing Royal since 2016 believe it or not, so this was not opportunistic at all to bring this one into our family. We really like the space. We really like the people in this company, they're innovators. They're sort of the benchmark for on-highway safety to protect work crews. They're the company that always sets the bar higher and the entrepreneur that started the company is personally known as a leader in that field. So we really like Royal and we were very pleased to finally get that acquisition across the line.

Great. Thank you.

Our next question comes from Mig Dobre with Baird. Please go ahead.

Jeff, Richard, good morning. Thank you for…

Thank you, Mig.

Thank you, Mig.

Yeah. Thank you for taking the questions. So I'm new, I'm new to the story here. I'm still learning. I've got a number of questions. Hopefully, they're not going to be too basic here. But maybe the first one on Vegetation Management. Can you talk a little bit about seasonality here in terms of how your orders are coming through? I mean, it's encouraging to see that year-over-year that decline has stabilized, but in terms of how we're thinking about the sequential uptick? And also, what normally happens with orders for this business in the fourth quarter?

Yeah. Mig, this is Richard. In a normal cadence environment with this type of business, they're a bit cyclical from a standpoint that they put up pre-season programs that start maybe late summer. And then, different products different groups and then they'll go out for 60 days and then another one will pop up and they'll go out through November. So what they're trying to do is build their backlog of taking orders in, so that allows us to manufacture those products through the fourth quarter and into the first quarter, where we're able to not just -- obviously just manufacture but to make deliveries all the way through. That cadence does slow down a little bit as you move into Q2 and Q3 because a lot of farmer – hobyy farmers and ranchers are out working their properties so they don't buy as many whole goods. They will buy some whole goods but we get a bigger increase in parts sales during the second and the third quarter which is why our margins actually peak up a little bit in the Vegetation Management division. So that's pretty much how it lines up for them.

And then what happens in the fourth quarter?

Fourth quarter they'll have pre-season programs Mig probably through until about November and then they'll shut it down. But that builds that backlog and it allows us to manufacture so sales usually stay pretty steady through the fourth quarter from a whole goods standpoint. Parts will drop off a little bit during the fourth quarter and the first quarter.

Right. I guess what I'm trying to figure out here is what your expectations are in terms of backlog and book-to-bill exiting 2023? And related to the backlog has been coming down a bit. What do you sort of consider to be a normal level of backlog? At what point in time should we start thinking about your revenue needing to sort of closely match orders on a go-forward basis?

Yes. That revenue and backlog are already converging in that division Mig and the reason for the big fall in backlog wasn't the result of loss of orders that was a result of order cancellations through Q2 and Q3 so and that was particularly notable in the forestry side. It had nothing to do with ag. There had been some speculative volume going on in forestry most notably in the land clearing space. There's sort of play this also over Q2 and Q3 and of course what we're reporting is net bookings at the end of the day. Now forestry has started to tick back up a little bit and we made some shipments in Q3 and forestry to the supply chain that have started to resolve now in Q4. So as Richard said Q4 is normally a little bit softer for Vegetation Management because it's not their operating season and the margins are typically a little bit higher in that segment in Q2 and Q3. But we're in a distorted situation at the moment because of the -- first of all the results of the pandemic and the supply chain. But then followed by the inventory build or inventory bubble that built up in Q2 and to a lesser extent in Q3 particularly in the ag space. That field inventory is now coming down we're very pleased with that so I think we're returning to a more normal cadence. So normally you can expect in the Vegetation Management side Q4 will tick down just a little bit and the margins may tick down just a scooch because of the parts impact that Richard was talking about. The wildcard here is the big ticket items in forestry. You ship $1 million machine those are high-margin products for us out of Morbark and we're going to pick up a few of those that we missed in Q3 this year.

One other point too Mig on that is that just remember the backlog right now in the Vegetation Management is still about twice as big as it was pre-COVID. So it's doing really well and it's holding up just fine. If you look at the small ag and hobby farmers they did a bunch of COVID buying during 2021 and partially 2022 that hasn't repeated itself just yet so.

But to be clear in terms of normalized backlog in this business would you consider one quarter's worth of shipments to be a normalized backlog? Is it more? Is it less? What's normal?

Yes. In the ag piece of that division one quarter is normal. In forestry it's more like two. So it depends on the mix in the division between the two Mig. But yes your thinking is right. It's about a quarter normally in ag and then two quarters in forestry.

If it gets much bigger than that Mig then you start pushing out past the deliveries more than three months to four months and that could be a problem. But actually it's fine right now as Jeff said.

Understood. A couple of questions on Industrial too if I may. The first one is on the supply chain where it sounds like things are getting better. You didn't talk about any impact from UAW everything that's going on that side. Anything to comment on that end?

Yes. I actually had a comment and then later took it out in my remarks Mig, because I didn't think it was significant. We haven't really seen a meaningful impact from the UAW strike or its aftermath. The supply of these Class 3 to 5 chassis was tight even before the strike and it remains tight. But some of these smaller sweeper contractors that's really where we use these. And on the very low end of our snow removal business there still were dealer inventories available so we've kind of scoured the country to buy up as much of that as we can and we've been able to hold our own there. So I'm not really losing a lot of sleep on that particularly with the strike now having resolved to be candid.

Understood. Then the final question and the guys before me were asking about margin I will ask about margin as well. When recognizing the fact that you have a lot of backlog in this business and obviously the supply chain like you said has gotten better. As we think about the fourth quarter, is it sort of reasonable to expect that revenue would be a similar level as Q3 or maybe better? And if that's the case do we continue to see this trend that frankly you've put up for like five quarters in a row here of continued sequential improvement in margin? Q4 versus Q3? Thank you.

Well, I'm certainly hoping so, Mig. And as I said Industrial could normally tick down a little bit in Q4 but I don't think it will this year because of the behavior of snow removal. Our snow removal business is in uncharted territory in terms of size scale volume and profitability and it hasn't begun to hit the stride yet to be candid with you. So we've got some new products that we get in a nice margin on. We're the only player in the market with those products and I think we're really doing a good job capturing a nice bit of the share in that space. And we do supply the complete plow truck including the chassis. We didn't always do that. That was a recent change in our strategy about a year ago. I think you and I spoke about that this time last year Mig. That's really playing out very well for us. So I think so. I think we can set another record in the fourth quarter. I never guarantee anything but I think Industrial has got some room to run here then. As I said they're not out of gas from either a sales point of view or a margin point.

Super. Thank you.

Thanks Mig.

[Operator Instructions] Our next question comes from Tim Moore with EF Hutton. Please go ahead.

Congratulations on the impressive continued execution and it was really nice to see that backlog hold up when the overall sector backlogs are rolling off from pretty much broad-based. But my first question is about Industrial Equipment. It had a consecutive very large sales growth jump at 23%. Richard I was just kind of curious if there's any way to quantify or parse out maybe half that 23% growth was from the supply chain catch-up with the chassis and not as many subcomponent shortages? And if the other half might have been from just higher broad-based demand for the end markets? Any thoughts to maybe how …?

Yes, I think your latter comment is definitely there. I think probably the biggest thing that we continue to feel very comfortable with is our chassis deliveries. We're on consignment on all of our chassis deliveries and that has really worked out extremely well for us. The component pieces the component parts it varies, but it has really improved a tremendous amount since Q1 of this year. Q2 got better, Q3 is even better. So I think the key to those is making sure that those come in, in a timely fashion and we don't have to wait. That takes care of a lot of our under-absorption problems that we've been having in the past. And I think you remember we had that conversation in Q1, which is what really hurt us there. But overall it's moving in the right direction. We just need to keep that consistency moving forward. And we should continue to see those margins going up.

Great. Yeah. That's helpful. And …

Tim it's Jeff here. I want to add a remark to that if I could. The growth of our rental fleet in vacuum trucks has also been constrained by chassis supply. We're now starting to receive enough chassis that we can start really building that fleet again which will help us from a profitability point of view and a sales point of view. So that's a very important change in sort of the cadence of industrial. That's been constrained very harshly by the chassis supply situation. And if you go back and look at the value of our fleet over the last couple of quarters, it's been really flat. So I'm optimistic now, we'll start to get that fleet growing again. And that will help us from a profitability point of view.

That's a great point on the fleet. Just maybe switching gears to in-country production. Are the European plan expansions on track maybe for the UK and France? And do you plan on doing some expansion in Indiana or any where else?

The UK expansion is going very well. We're slightly ahead of schedule there right now. We were just discussing with our Board this week a further expansion of our Vacuum Trucks Facility in France and we'll be making a fairly sizable investment there as well. So I think the timing of that is going as expected from our point of view. The Indiana plant doesn't need a lot of CapEx. It's already bigger than what we need for Dixie Chopper. but we are starting to accelerate the transfer of other products into that plant now because we do have a workforce available there. That hasn't really played out in our financials yet Tim. I think you'll start to see that late Q1 and early Q2 of next year.

Great. That's really helpful. And maybe just switching gears on a topic that hasn't maybe come up in a little while it was your electrification and hybrid launches seem to be more of a 2024 story. I think a lot of it seems to be driven just by the world changing and noise [Indiscernible] in cities away from diesel and fuel. Is there any kind of sneak preview you can give us? Some more penetration maybe of the hybrid Timberwolf Chipper or the small Nite-Hawk Sweeper or The Gen 2 Mantis or any type of other launches coming out next year? Or innovations?

Yeah. The official market introduction of Gen 2 Mantis is happening in Q4. That was held up by the supply of the engines. There was an engine certification process needed by the EPA that we finally got complete so those engines now can be tagged as compliant. We have them in our hands. They can be tagged as compliant. And we could start shipping so that's beginning to ramp up. On the Sweeper side, there's only a handful of electrified chassis coming out of the Daimler Organization for next year.. But we're getting most of them, which is a really pleasing sign of the relationship that we have with Daimler. So I think that's probably a back end of 2024 issue, when you'll start to see those going to market and meaningful numbers. The Nite-Hawk hybrid is just being introduced now. The reception has been tremendous to that. Really, really good. And we also have a hybrid version of our leaf vacuum trucks. It's been very well received in the market. So, I think you'll start to see us actually putting a bit of product on the streets, let's say second quarter next year. That's how I think this will play. Q – Tim Moore: That's helpful, Jeff. My last question is just Richard pointed out, and we've been watching the terrific free cash flow and the debt deleveraging and a very clean balance sheet. I mean it's very impressive. That Royal truck acquisition seemed like a nice bolt-on. It adds on around maybe nearly 3% to your annual sales. Do you see -- as you look out maybe the next few quarters, do you have a preference on doing maybe a few more of those bolt-on acquisitions in the funnel? Or do you think that you would be ready to maybe do a larger strategic acquisition a couple of quarters out?

We're ready to do a larger strategic acquisition right now. We just haven't found the right thing. So in the meantime, we're back to doing what we do. We're just making a steady diet of smaller things. We've got a couple of others in the pipeline, that we're very excited about and as I said we were very, very patient with Royal. I remember, when I was still running the Industrial division when I met the Royal folks for the first time years ago, so it was nice to see that one come. But there's a couple of other tuck-ins like that that we're in kind of the middling stages with that I think we'll see play out early next year. So, we're just kind of doing what we do in there waiting for something big, but we like to become available. There hasn't been much come available in the forestry space, that's been the right fit for us. And of course, we have to have something that we're not going to have issues with the federal government about from a market share point of view as well too.

Great, Jeff. Thanks for that color and that’s it for my questions.

Appreciate a lot.

Thanks, Tim.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

All right. Again, thank you everyone for joining us on the call today, and appreciate all the great questions that were put forward to us. We look forward to speaking with you again on our fourth quarter conference call in February of 2024. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.